Non-banks left out in the cold by BoE’s Covid-19 strategy

By Alejandro Gonzalez March 17, 2020

The Bank of England has ‘missed a huge opportunity,’ according to the FLA, ‘to get funding to as many SMEs as possible’ when it unveiled its coronavirus support package in March 2020. Alejandro Gonzalez reports

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In deciding to exclude non-banks from its cheap funding scheme for small businesses hit by the spread of coronavirus, the Bank of England “is missing a huge opportunity” according to Stephen Haddrill, the director-general of the Finance & Leasing Association (FLA).

In a letter published in the Financial Times, Haddrill regretted the fact the BoE’s coronavirus ‘term funding’ scheme, unveiled ahead of the Spring budget, was only open to incumbent banks and challenger banks.

The bank’s Term Funding Scheme for Small and Medium-sized Enterprises (TFSME) excludes non-bank lenders from distributing its funds.

Haddrill said in his blog on the FLA website that by excluding non-banks from the funding mix for small businesses, the BoE would not “get funding to as many SMEs as possible.”

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“FLA members play a huge role in the engine room of the economy, providing the finance that underpins much consumer spending and business investment,” he wrote.

Haddrill argued in his FT letter that: “Asset finance (leasing and hire purchase) is the second most popular type of funding for SMEs, and worth £20bn of new finance a year. These firms are here and ready to help.”

TFSME was agreed by the BoE’s Monetary Policy Committee as part of a host of “timely and powerful” measures to counter the impact of coronavirus on the UK economy, Mark Carney, the then bank’s governor, told a press conference earlier this month.

Simon Goldie, head of asset finance at the FLA, welcomed the government’s fiscal stimulus and monetary initiatives targeting SME funding.

He said non-banks were perfectly placed to lend to SMEs and the BoE needed reminding of this fact: “There are lots of other funders out there. They are ready to lend or are already funding. So let’s extend this to them too.”

He said it was worth keeping in mind that non-banks come in various business model types and company sizes and so can often be a suitable fit for SMEs.

In approximate terms, non-bank lenders make up over 50% of the FLA’s membership. Non-banks, along with traditional banks and challenger bank lenders, are all hugely involved in asset finance and leasing.

Governor’s Covid-19 tool kit

The BoE’s Covid-19 monetary policy measures include: a bank rate cut; the easing of capital controls, and an offer of cheap credit (the TFSME).

The Monetary Policy Committee lowered the bank rate to 0.25% (down from 0.75%) ahead of the Spring Budget, and then down to 0.1% the following week.

The BoE loosened banks’ capital controls – the so-called countercyclical buffers – estimated to allow banks to draw down an addition £190bn in corporate credit, equivalent to 13 times banks’ net lending to businesses in 2019, the FT estimated at the time of the first interest rate cut.

The BoE said the TFSME would be given a second life, after first being introduced by the bank in 2016 (as the Term Funding Scheme) to support lending in the aftermath of the EU referendum.

The scheme offers commercial lenders cheap borrowing rates “at, or very close to”, the benchmark rate, according to the BoE, and be available for a year.

Although the BoE has no authority to compel banks to pass on lending to its customers, the BoE’s Prudential Regulation Authority urged banks to resist the temptation to use funds released by the measures to increase dividends or to boost bonuses.

With this in mind, the TFSME introduces “additional incentives” for banks to support lending to SMEs “that typically bear the brunt of contractions in the supply of credit during periods of heightened risk aversion and economic downturns” the BoE stated on its website.

The BoE’s term funding for SMEs could be aimed at achieving two goals. To protect the profit margins of banks, squeezed by rock-bottom interest rates; and to push banks into releasing funds towards cash-strapped SMEs and away from investors or bank employees.

Lindsay Town, chief executive at IAA-Advisory, said: “Central government-supported funding may also help to avoid a repeat of the vast liquidity crunch that we saw in 2007/2008 which could be a lethal “add on” in the current crisis.”